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Operator
Good morning, my name is Brittany, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Royal Caribbean Cruises Limited third quarter earnings conference call.
(OPERATOR INSTRUCTIONS) Thank you.
Mr.
Brian Rice, you may begin your conference.
Brian Rice - EVP, CFO
Thank you Brittany, and good morning everyone.
I would like to thank you for joining us this morning for our third quarter earnings call.
With me here today are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and CEO of Royal Caribbean International, Dan Hanrahan, President and CEO of Celebrity and Azamara Cruises; and and Ian Bailey, our recently appointed Vice President of Investor Relations.
As have we done in the past, we have posted slides on our investor website, www.rclinvestor.com, which we will be referring to during this call.
Before we get in to our results and talk about the current operating environment, I would like to remind you of our notice about forward-looking statements, which you will see on the first slide.
During this call we will be making comments which are forward-looking statements.
Forward-looking statements do not guarantee future performance, and do involve risks and uncertainties.
Examples are described in the SEC filings and other disclosures.
Additionally, we will be discussing certain financial measures, which are non-GAAP, as defined by Regulation G, and a reconciliation of these items can be found on our website.
Richard will begin with an overview of our position.
I will follow with a brief recap of the third quarter, update our guidance, give some insights into the recent demand environment,t and details about our capital structure.
Adam and Dan will then talk more about their brands, how we are managing the business in the current environment.
Richard Fain - Chairman, CEO
Richard?
Thank you Brian, and good morning ladies and gentlemen.
A lot has happened over the last three months since the last earnings call.
Until very recently, most of all that what was happening was good news.
Our bookings remained strong, despite a weak economy, operating costs were coming down nicely, fuel prices were falling sharply, and our brands were performing extremely well.
Than, a little over a month ago, we witnessed a historic change in the financial markets, and in many of the key drivers of our business.
The resulting deterioration in consumer confidence and spending now requires us to confront new realities.
I wish we knew with certainty the depth of the duration of the credit crunch and the economic slowdown that we face.
Unfortunately, we don't have all the answers anymore than anyone else.
One interesting aspect for us is the need to recalibrate our forecast for a different pattern of consumer behavior.
Historically, we've been very successful in using the pace and the type of current bookings to predict future demand.
We have enormous volumes of data that allow us to extrapolate future bookings, based on how people are buying cruises today and what their price elasticity is.
Unfortunately, the current turmoil came suddenly and disrupted our normal patterns.
In addition the feedback we get from our guests and from our travel agent partners clearly demonstrates that the consumers is as confused about the economic situation as anyone.
And consumers hate uncertainty just as much as we do.
As we have seen in other analogous situations, during times of sudden change and high uncertainty, our customers hold off making any decisions they can.
In today's situation, there simply hasn't been enough time for the public's attitudes to stabilize, nor has there been enough time for us to determine the new patterns and adjust our revenue models to compensate.
That will come.
Against this background, it's necessary for us to relook at all aspects of our business, and ensure that we are taking all steps to prepare for a different market than we had hoped for.
Obviously the dramatic fall of the price of oil helps, but we do need to go much further.
Brian will talk about bookings and finance.
and Adam and Dan will talk about what they are doing with their brands.
In general, I think you will see that we recognize the importance of being proactive in reducing our risk profile.
While I am very confident in our business model and the strength of our brands, it's our responsibility to find ways to further mitigate risks during such extraordinary times of uncertainty.
As you can see we have about $1.4 billion in liquidity.
We've implemented aggressive but prudent cost savings initiatives, that we expect will yield us about $125 million in annual savings.
We've slowed capital expenditures, and will be guarded before committing to new ship orders.
We've diversified our guest sourcing and ship deployments, so that in 2009, more than 40 percent of our revenues will come from outside of North America, up from only 30% last year.
One specific area I would like to address is the financing of our new building.
It's long been a practice at Royal Caribbean to make sure we have financing arrangements in place before we order a ship.
We're very fortunate to have not only extraordinary designs and shipyard partners that produce amazing ships, but financing arrangements that give us the flexibility to raise the necessary capital, even during the most challenging of times.
In our press release we have provided more explanation of the financing commitments we already have in place, and Brian will talk further about it.
Obviously in today's financial world, we are extremely pleased to have these arrangements already in place.
We do believe they will be adequate to finance ships on order, and we don't envision any other requirement to access the capital markets in the foreseeable future.
I wish the strength we showed during the weak economy earlier this year was sufficient to overcome all obstacles, but the recent disruptions have been too sudden and too pervasive to leave us unaffected.
We still believe our resilience will help us weather this storm, but we will also have to take aggressive steps to adjust to this new economic and social environment.
I'm confident we have the structures in place to weather a very difficult situation, even for a sustained period if necessary.
But, I am just as bullish that we have the strategy and we have the brands in place to thrive when the economy does begin to rebound.
Brian.
Brian Rice - EVP, CFO
Thank you Richard.
I would like to briefly go through the third quarter results.
I suspect most of you are more interested in the forward looking environment and our capital structure, so I will just hit the highlights.
As we said in the press release, our earnings per share $1.92, or about $0.25 better than previous guidance, and $0.08 better than last year.
This was the best quarterly financial performance in our Company's history, despite the deteriorating economy and high fuel prices.
Revenue yields were up 0.7%, which was slightly lower than our guidance, of an increase of about 2%.
While all of our brands were impacted by foreign currency to some extent, Pullmantur is our only entity that has a functional currency other than US dollars.
On slide two, you will see our previous guidance for the third quarter in our results is reported.
We also shown how we would have performed if Pullmantur's rate of exchange remained the same as at the time of our last call.
As you can see, aside from the significant strengthening of the dollar and it's negative impact on the Pullmantur results, revenue performance was consistent with our prior guidance.
On the cost side, net cruise costs excluding fuel came in 2.3% below last year, and well below our prior guidance.
Pullmantur benefited from the stronger dollar, and we did have some expenses that shifted out of the third quarter and into the fourth.
But our cost performance continues to improve, and all of our operating groups are doing a terrific job focusing on ways to create efficiency and lower our costs.
Higher fuel prices increased costs by $65.1 million or $0.30 per share, but largely due to falling prices, our fuel costs came in about $0.07 per share lower than at the time of our last call.
So, all in, our net cruise costs, including fuel, were up 5% versus a year ago, and substantially lower than previous guidance.
Now I would like to provide you with update on bookings.
For well over a year we have been talking about the resilience of our business model in a very lackluster economy.
We have been able to absorb new capacity and generate the highest yields in our Company's history, even in a difficult economy.
Unfortunately, the events that have transpired over the course of last six weeks or so took the economic downturn to a new level, which significantly impacted consumer confidence in our bookings.
I would like to start by showing you a slide we have used frequently on our calls.
On slide three, we have updated the graph that shows the quality of pricing for close-in demand.
For more than a year, we seen better pricing for close-in bookings than we did the previous year.
But as you can see, in August pricing began to flatten out, and in September, we had a rather significant dip in the quality of close-in pricing.
On slide four, we have tried to give you some insight into the new booking pattern since the beginning of September.
At the beginning of the month, we saw modestly lower booking volumes compared to a year ago, but nothing unusual given our strong order book at the time.
Bookings began to show additional weakness in mid-September, about the time of the Lehman bankruptcy.
Towards the ends of the month when Congress was dealing with the bailout package, we began to see a more rapid decline in new demand.
For the last two weeks, despite the dramatic volatility in the market, bookings appear to have leveled off, and we have actually seen a more consistent pattern.
Obviously, two weeks does not make a trend, and the environment is so erratic right now, it's virtually impossible to anticipate consumer behaviors in the near term.
For booked business, our individual cancellation patterns have not changed materially.
In fact, since the beginning of September, our individual cancellation rates have been slightly lower than we saw a year ago.
On the group side we have seen a more cautious approach by the trade, with travel agents being more reserved in securing group space for further out sailing.
Throughout this period, we have been taking varying degrees of pricing action.
Consumers are understandably distracted by the current events and holding off on major purchase decisions.
For the most part, our more aggressive price reductions have taken place for the fourth quarter sailing.
Into 2009, we have begun to take some pricing action, but we have had more of a tolerance for booking volume deficit in response to consumer behaviors, and to give our revenue management team more opportunity to better understand the elasticity pattern.
I would like to give you one example, though, of a one day sale we did for our Royal Caribbean International brand, which demonstrates the types of actions we have available to stimulate demand.
Over the last couple of years, we have done what we call a WOW Sale, in the spring and the fall.
This year, the sale which had been scheduled for some time, fell on October2, which was a Thursday.
On slide five, we have shown the net ticket revenue produced from the WOW Sale, compared to other Thursdays since the beginning of September.
The sale included a reduced deposit, an onboard credit, that equated to roughly 7% of the ticket price, and additional promotional support from our sales and marketing team.
The sale received more tempered response than we have seen in the past, but did provide a significant boost in bookings nonetheless.
Considering the sale likely consolidated some bookings from surrounding sailings, we estimate the sale roughly doubled the revenue we would have otherwise expected for that day.
And lastly on bookings, if you look at slide six, you will see directionally where our load factors stand for the first and second quarters, relative to the same period the last three years.
While bookings in both quarters are now trailing the same point in time last year, we are still in a strong position relative to 2007 and 2006.
I will also mention that the average price booked business, for both the first and second quarters of 2009, is currently higher than at the same time last year.
But I would like the mention again, the market is very erratic right now, we just do not have enough visibility yet to make concrete projections for 2009.
Now I would like update you on our forward guidance for the balance of the year.
On slide seven, we have provided our guidance for the fourth quarter in the same format we showed the third quarter results.
As was the case in the third quarter, the stronger dollar has had a negative impact on Pullmantur's revenue, but a positive impact on cost.
To help you better understand the impact of the recent changes in demand on our revenues and also our cost savings initiatives we have added the second column to show you how the fourth quarter would have looked using the same Euro exchange rate for Pullmantur, as we had at the time of our second quarter call.
As you saw in our press release, we are projecting a yield decline of between 4% and 5% for the fourth quarter, whereas about three months ago, we were in anticipating a solid yield improvement.
Just over half of the decline from our last call has been due to the stronger US dollar.
The balance of the decline has been caused by weaker demand for close-in cruises, deterioration in Pullmantur's tour demand, and somewhat weaker onboard revenues.
Traditionally, the fourth quarter sailings are the most price sensitive.
This, compounded by the timing of the financial crisis, put pressure on our ability to generate close-in demand for the fourth quarter.
The softening demand in Pullmantur's tour division will be offset by cost reductions, since the capacity of the tours is variable.
Onboard revenue has recently begun to show some signs of weakness, and similar to ticket prices, this deterioration has occurred fairly recently and it is too early to fully understand.
Net cruise costs, excluding fuel per APCD, are projected to decline approximately 1%.
As I mentioned earlier, we did have some timing shifts from the third quarter, but much of this has been offset by additional cost savings.
And as you can see, without the benefit of the stronger dollar on Pullmantur's cost, we would have been up between 1% and 2%.
Based on today's bunker prices, fuel cost are projected to be approximately $146 million in the fourth quarter.
We are 55% hedged, and our average net cost per metric ton would be approximately $454.00 in today's prices.
Our best estimate today for earnings per share for the fourth quarter is between $0.05 and $0.10.
Our updated full year guidance for 2008 can be seen on slide eight.
We now expect net yields to be up approximately 1%, net cruise costs to be up approximately 3%, and net cruise costs, excluding fuel, to be about flat.
Our earnings per share forecast for the year has increased to be between $2.73 and $2.78.
We are currently developing our operating plans for 2009.
Most of our savings initiatives are now in place, but we are still confident net cruise costs, excluding fuel per APCD, will come in at or below 2007 levels.
On our last call we gave a preliminary number for 2009 fuel expense of $890 million, and mentioned we were 22% hedged.
Today we are 39% hedged for 2009, and based on today's at the pump prices, we would now project fuel expense in 2009 to be approximately $635 million.
At this level, our cost per APCD would be about 13% lower than our current estimate for 2008.
Given the tremendous credit crunch in the market, we thought it would be useful to provide you with more details about the financing arrangements Richard mentioned in his comments.
As you know, last week we took delivery of Celebrity Solstice.
The vessel was financed through a $519.1 million loan facility, with KFW and [DMT Parabith].
The facility is a 12-year, semi-amortizing unsecured loan, bearing interest of Libor plus 45 basis points, or currently 4.28%.
We were able to accomplish this despite the tight credit market, because we have always placed rate emphasis on optional financing arrangements prior to entering into a [construction] agreement.
We have four additional Solstice class ships on order in Germany, and will take delivery of one ship in each of the next four years.
For each of these vessels, we have committed bank financing arrangements, that include financing guarantee from Hermes, the export credit agency of the German government.
The terms of the financing guarantees and bank commitments are similar to those that I described for the Celebrity Solstice, and executable at our option.
We also have two Oasis class vessels under construction in Finland, for our Royal Caribbean International brand, the first of which we will take delivery of in the fourth quarter of 2009, and the other a year later.
We have secured loan guarantee commitments from Finvera, the export credit agency of Finland, which provides potential lenders with government guarantees of up to 80% of the financed amount.
We expect these financing arrangements will be adequate to meet on going operations and capital expenditures requirements, and do not anticipate other requirements to access the capital markets in the foreseeable future.
Now I would like to update you on our liquidity.
As of September 30th, we had approximately $1.4 billion in liquidity, including $300 million in cash and cash equivalent, and $1.1 billion in our unsecured revolving credit facility.
Subsequent to September 30, we did draw an additional $460 million, to have additional funds on hand for potential working capital needs, and in response to the current instability in the global credit market.
In summary, we recognize the high degree of uncertainty in the market today, and believe we have taken proactively taken prudent measures to lower our risk profile and to ensure our financial stability.
Nonetheless, it is because of times like this that we maintain a $1.2 billion revolver, with a diversified portfolio [with solid bank].
I would like to turn the call over the Adam for his comments about the Royal Caribbean International brand.
Thank you Brian, and good morning everyone.
Adam Goldstein - President, Royal Caribbean International
We are pleased with our record third quarter results, but obviously concerned about the current market conditions.
Although we are disappointed that the market has softened, it is our belief that Royal Caribbean International continues to fare well in competitive terms within the industry.
The weakness we are feeling stretches across most variables of the business.
Within North America, we are seeing roughly the same level of challenge from different geographical source markets, as well as from different state room categories.
We are not seeing variation from last year in terms of first timers versus repeat cruisers, or in terms of age distribution of our guests.
From a product standpoint, if there is relative strength,it is in the Caribbean, where APD's are up year-over-year, albeit load factors are currently down.
Also, Mexico is doing relatively well, given we are replacing a Vision class ship with Mariner of the Seas of the Voyager class.
Our more exotic products are experiencing more of a challenge primarily in terms of sourcing North American customers.
Our international point of sale is faring somewhat better, but our expectations are also higher as we grow this segment.
This highlights one of the benefits of the increasingly global nature of our brands.
Individual products and markets do go through cycles.
It hasn't been that long since many observers were decrying the state of the Caribbean as an over-saturated market.
Yet today, it is one of the better performing markets.
Diversitility of our brands is an asset for us as we work through these cycles.
Switching to onboard revenue, our performance year to date is approximately flat on a year-over-year basis.
While we cannot forecast onboard revenue as we do ticket revenue, we would expect the current economic conditions to have somewhat of a negative effect on onboard revenue.
As far as sectors of onboard revenue are concerned, one of our strong performers this has been our Shore Excursion business, particularly on our European cruises.
We have previously noted that onboard Art Auction business been a weak spot this year.
Most of the other areas are roughly consistent with prior year performance.
Clearly in this environment we are focusing on being as cost conscious as possible, while continuing to deliver a world class product.
This includes our fuel conservation, workplace safety, and other behind the scenes efforts.
There is considerable focus on identification and replication of best practices across the fleet to promote efficiency.
In addition, where we believe there are product elements that are less relevant or appealing to today's guests, we place less emphasis them, or even eliminate them altogether.
Meanwhile, we continue to introduce innovations that add significant value, as we are doing for example with the rollout of My Time Dining, that is currently underway in the fleet.
From a G&A cost perspective, there is an intense focus on increasing productivity and driving efficiency, which is enabling us to move forward in a positive manner following the reduction in force that we implemented some months ago.
I would like to acknowledge the efforts of our officers and other leaders to reduce or eliminate costs.
Turning to Oasis of the Seas, we look forward to her floating out on November 21st.
Her construction process coming along well.
We have now completed our reveals of all seven of the neighborhoods that describe different concentrations of interest around the ship.
The ship continues to receive worldwide publicity.
We started to accept books a few weeks after the last earnings call, and we are pleased with the bookings we are taking, especially considering that the maiden voyage is still more than a year away.
Dan?
Daniel Hanrahan - President, Celebrity Cruises
Thank you Adam, and good morning everyone.
As you have heard Brian and Adam comment, our third quarter was very strong.
However, we quickly moved past the third quarter, and all our efforts are focused on understanding the environment in which we are operating.
It is challenging to get insight on consumer purchase patterns.
We have seen some success being able to stimulate close-in demand.
Our focus has been on working in partnership with our travel agent partners on directed consumer marketing efforts, with offers targeted in the fourth quarter, and through January and February of 2009.
We have seen reasonable close-in build as a result of efforts.
We do find it encouraging that we are not seeing a spike in cancellations.
The business we have on the books to date has stuck fairly well.
We will continue to concentrate our marketing and sales efforts to stimulate close-in bookings.
Our larger travel partners are continuing to spend their own marketing dollars, as well as our co-op dollars, to focus on the same areas.
We are also very focused on continuing to manage our expenses without impacting the guest experience.
Fuel consumption is just one of the many areas that continues to receive a great deal of attention.
We also have continued to challenge our supply chain organization, to think differently about how we source the products we need on the hotel and marine side of business.
For example, earlier this year, we made a decision not to sign year long commitments for certain products, which would have been the practice in the past.
We felt we would be able to realize better pricing in the markets.
This has allowed us to take advantage of declining prices on these particular products.
As our European business grows, we began preparation two years ago by putting a procurement office in Europe.
This European season we opened two distribution centers, one in Civitavicchia and one in Rotterdam.
This move has helped improve our service levels to our ships, while helping us to better manage our freight and logistics costs this year.
We are operating as a European company when it comes to managing our procurement and logistics.
We have also begun to realize some synergies with Pullmantur on their needs.
We believe we can continue to help them leverage our buying power to manage their expenses.
These are just a couple of examples of the success of supply chain organization is having on helping us manage our costs.
Finally, we took delivery of Solstice last week.
We were able to show her to a number of UK and German travel agents.
The response is better than we hoped it would be.
The ship has exceeded everyone's expectations, and we are looking forward to showing her off during her pre-inaugural cruises in the middle of November.
We have a real winner in Solstice, and believe the pre-inaugural cruises will be a great demand stimulant.
Brian?
Brian Rice - EVP, CFO
Thanks, Dan.
Brittany, we would like to open up the call up now for questions.
Operator
(OPERATOR INSTRUCTIONS) Your first question from the line of Robin Farley with UBS.
Robin Farley - Analyst
I have a couple of questions on expenses.
First in the quarter, currency obviously brought yields down a little bit and you quantified that, can you quantify how much of the non-fuel expense, being lower than guided, was due to currency?
Brian Rice - EVP, CFO
Robin on the second slide, we have broken out Pullmantur for both revenues and expenses.
On net cruise costs excluding fuel, you can see it was an about 80 basis points change.
So where we had guided that we would be up between one and two, we reported we were down 2.3 currency actually would have made that down about 1.5.
All we have translated here is the Pullmantur expenses, since that's the only place we have a different functional currency.
It's the same case on revenue.
Robin Farley - Analyst
So, it would have been down 1.5 - -
Brian Rice - EVP, CFO
Correct.
Pullmantur, in other words, some of your other brands would have also lower expenses due to currency, wouldn't they, even though the incomplete functional currency - - We do have some expenses.
We are actually long on revenues; we are long on foreign currency net for Royal Caribbean and Celebrity.
We have the Brilliance [lease] for Royal Caribbean is denominated in sterling, and then we have some operating expenses associated with our sales offices and our port within Europe.
But, net net it's a greater impact on revenues than it is on cost.
Robin Farley - Analyst
Okay, so if for those other brands, there would be some additional benefit on the expense line, in addition to that 80 basis points?
Brian Rice - EVP, CFO
Yes.
If, after currency, we still had a net savings on our cost structure.
Robin Farley - Analyst
But you can quantify outside of the Pullmantur brand, what the currency benefit was?
Brian Rice - EVP, CFO
It's not dramatic.
I can tell you that we would have been very favorable had it not, even without the currency.
Robin Farley - Analyst
I guess in previous quarters, I know people asked about the benefit of currency on the yields and you haven't broken it out before, can you give us sense of what the benefit from currency has been, by your calculations in the last year?
Brian Rice - EVP, CFO
I don't have prior periods.
I think the best thing I can point you to is the fourth quarter guidance.
We haven't broken it out before, because frankly, it hasn't been relevant.
Pullmantur again has a different functional currency, so for that brand it was easy to break it out for you, and you can see that it was about 300 basis points for our fourth quarter on revenue.
That's been very unique, given the strengthening of the US dollar.
If you listened to the comments that we made about our overall guidance that a little more than 50% of the movement in our yield guidance for Q4 was due to currency, and you add that to the 300 basis points for Pullmantur, you could infer that it's 200 basis points' impact on Royal Caribbean Celebrity.
Again, this is by far the single biggest movement we have seen in currency and the reason we felt the need to call it out here, for both revenues and costs.
Robin Farley - Analyst
Then in terms of CapEx, just looking at your CapEx guidance, versus over the last quarter you gave guidance, it looks like CapEx went up $300 million in '08, and it went down $100 million in '09, so maybe $100 million shifted.
Can you give us a little color on what the $200 million higher in CapEx in '08, and especially since this guidance change just occurred in the last quarter.
Looks like a big chunk coming up at the end of the year.
Brian Rice - EVP, CFO
It's $200 million, in actuality, it's about $160 million.
What occurred, as you know, Pullmantur has traditionally leased aircraft.
When we bought Pullmantur, they had three, 747's on lease.
Those leases expired, and as we did the IRR, we found an attractive opportunity to actually terminate those leases and buy three Pullmantur aircraft.
So the net net was we decided to buy instead of lease, and we were also able to upgrade the aircraft 747-400, which are much better aircraft, more efficient on fuel, and also much greater resale value.
Robin Farley - Analyst
Alright, and them my last question, just in terms of the currency, on new ship orders, looking several years out, are they hedged, were they hedged within a few weeks of the time of order, or will there be some benefit to you now, in terms of the new build costs from the dollar strengthening?
Brian Rice - EVP, CFO
We have have been very consistent in our new build hedges.
We tend to be anywhere between 85% and 95% hedged on our new build portfolio.
We do have a policy that within about two weeks of signing a contract, that we keep the portfolio at that amount.
So it would be a little bit of benefit but not terrific amount, we tend to be hedged pretty well.
Robin Farley - Analyst
Thank you very much.
Operator
Your next question comes from the line of Steve Wieczynski of Stifel Nicolaus.
Steven Wieczynski - Analyst
Two questions for you.
Can you give a little more color on pulling the fuel supplements last week?
You guys have basically said you're not going to increase prices or haven't, like your competitors have.
Just a little bit more color there?
Daniel Hanrahan - President, Celebrity Cruises
This is Dan Hanrahan.
We did pull the fuel supplement for 2010, and the way we set this up is we said that for 2009, what we will do is we will look at what the prices are a couple of weeks out from the quarter, and depending upon if that price goes below $65.00, we would then eliminate it for the following quarter.
In regard to pricing, we're always managing our pricing, and trying to manage our prices up as high as we possibly can, so that's really more supply and demand driven than just making a blanket announcement that we would raise prices for 2010.
Steven Wieczynski - Analyst
Okay, and then something that your competitors are also doing, they've reduced deposits, so consumers don't have to spend as much up front, and you did that during your WOW Sale.
Is that something you guys are looking to do over the next couple of quarters?
Adam Goldstein - President, Royal Caribbean International
Hi, it's Adam.
Clearly, reducing deposits is one of the many tools we have in our arsenal for spurring business, and the WOW Sale that Brian mentioned included both a reduced deposit opportunity, as well as an onboard credit opportunity, and he may have referenced that the aggregate impact of those two tools on the pricing that we were offering was something like 7% discount.
So we have that option.
We don't expect to do that on an every day basis, but sometimes it helps us spur needed basis.
Steven Wieczynski - Analyst
Thanks, guys.
Operator
Next question from the line of Steve Kent with Goldman Sachs.
Steven Kent - Analyst
Good morning.
Two questions.
First Richard, you mentioned reduction in CapEx, are you referring to the '09, or are you really talking about a reduction in your CapEx plans beyond 2011, and given this environment, just pulling back from development and building of ships?
And then, just to echo Robin's question, I'm still wondering how this FX impact could be so dramatic in the fourth quarter and this quarter, and never have been very dramatic in the previous quarters, and maybe the way to answer this is to just simply show, for the past four quarters, what the FX impact has been, and then we can figure out how dramatic it really is.
Richard Fain - Chairman, CEO
I will answer the first question on CapEx, and then I will ask Brian the comment on the foreign exchange.
I think the comment on CapEx was a general one, in terms of all of it.
Of course the biggest capital expenditures that we do by far, the bulk of this, is on the new buildings.
And as we have indicated, we will be a lot, for sometime we have been probably less than some of our competitors, in terms of the total amount that we've done up until now, and I think we would be very cautious looking forward.
Those are about 85% hedged at the moment, so the FX helps us only very modestly on that.
We will also be looking more cautiously with respect to any new CapEx in the future, although it does take a while for existing CapEx to have worked its way through the system.
An example of that is the airplanes, which we bought much earlier this year, although that was simply replacing inefficient rented airplanes with more efficient owned flights.
Maybe I will ask Brian to comment on the foreign exchange.
Brian Rice - EVP, CFO
One thing I would point you to on the FX, in terms of the impact that it's had historically, just looking at the difference between Q3 and Q4, if you look at our slides, the delta between the corporate numbers and the numbers adjusted for Pullmantur, Pullmantur's effect in Q3 was only 100 basis points, but in Q4, it's 300 basis points.
The currency fluctuations have been absolutely dramatic since our call on July 22nd.
I recall one week, just about three or four weeks ago, where the Canadian dollar I believe dropped about 9% in one week.
And if I'm not mistaken, I think sterling dropped about 8% last week.
So the cumulative effect and the tight concentration of that in such a short period of time, what we have tried to do is we wanted to distinguish for you what is being driven by FX, what is being driven by the challenging market conditions, and give you a little more transparency than we ordinarily would, just because of the effects of both have been so dramatic, and we just thought it was very worthy to call out at this point in time.
Whereas, historically, in any given period, they have not been nearly as relevant as they are now.
Steven Kent - Analyst
Just one other thing, Richard, given what is going on, why not just commit right now to not building anymore ships?
We've seen the benefit in the Caribbean of low supply, you've seen it on the pricing even before this.
I guess I still struggle with both companies, and even the private companies, why not just slow down the CapEx finally?
It's obviously a benefit; there is not capital out there, the demand is not there.
I'm completely frustrated; I don't get it anymore why neither company will commit to this.
Richard Fain - Chairman, CEO
I think you said it a little bit.
We don't know what the future holds, and so I think for us to make a blanket statement really wouldn't be very constructive.
But I do think it's true, that today the demand wouldn't justify it, and I think we are looking forward to a time, which actually isn't that far off, when the existing orders run off, and we are then looking at the power of even better supply demand situation.
In terms of why we don't commit to what we might do under a different set of circumstances, I don't know what those circumstances are, so I don't think it's appropriate to make a commitment to it.
But we have said for some time now, that under current circumstances, we don't envision ordering any new vessels.
Steven Kent - Analyst
Okay, thanks.
Operator
Your next question comes from Scott Barry of Credit Suisse.
Scott Barry - Analyst
Hey, Brian.
Two questions, you mentioned that you had some tolerance for lower load factor into the first half of next year.
I assume you're thinking that we get some normalization in this environment and then there's some pent up demand.
Given your history in revenue management, is this environment we are seeing currently anything like anything you've seen prior?
Then secondly, there has been some significant compression in the distribution value chain since the last cycle.
Zero based pay in air, big increase in non-commissionables et cetera, are you concerned at all about the health of your agency partners; are you contemplating any strategic moves to support the channel?
Thanks.
Brian Rice - EVP, CFO
I will take the first part and ask Dan and Adam to comment on the distribution system.
I think the way I would describe the consumer sentiment right now for further out is a little bit of a deer in the headlights.
I think the consumer has a high degree of uncertainty.
We have seen experiences in the past, I would say after Gulf War in '91 and the recession that hit, and also certainly after 9/11, we probably had about a six week period where there was the higher degree of uncertainty.
I think right now we are not really sure if we are at the beginning, the middle, or the end of the cycle, and exactly what the depth will be, and that's why we are watching the bookings so closely, and tried to show you a little bit more about what has been happening day-to-day.
I think it's fair to say we are ensuring our short-term order book by taking the necessary pricing actions, and if you will, we're throwing the trial balloons out there for the future, to start being able to gauge the elasticity.
Frankly, I think doing any wholesale structural changes on pricing further out right now would be flowing good money after bad.
I don't think the consumer psyche is necessarily in the right place.
We have seen in the past that consumer does work through these cycles, and the elasticity comes back in to play, and our revenue management team is modeling this, studying it, and will continue to take appropriate actions.
But as you eluded to, we do have a little bit more tolerance as we go further out into '09 to allow - - Fortunately, we had a pretty good order book, which gave us luxury of time here to really study what is happening with the demand pattern.
Daniel Hanrahan - President, Celebrity Cruises
Hi, Scott, it's Dan.
In regards to our travel agent partners, we have been talking to a lot of them, as you can imagine, and probably moreso than we even normally do.
It's hard to believe we could talk to the travel agents more than we normally do, but I think we have been lately.
I would say there is a couple of things going on here.
Over the last four or five years you have seen a real movement to home based.
Though I think that there is a number of travel agents that have taken a lot of the expense out of running their business by going home, and I think that they will do quite well.
The large travel agent partners that we talk to on a regular basis I think are well positioned to get through this.
I do believe that there will probably be some, that as a result of the downturn in the economy, could end up having some serious problems, but I think overall at this point, one of the things that I'm seeing out of travel agents is they are continuing to market, and those that are continuing to market seem to be the ones that are driving the volume that we have today.
So will there be some fallout, yes, I think there might be, but I think we will have to watch that for a while.
But I do think those that made the decision to go home based have probably positioned themselves well in advance of this.
I don't think that's the reason they probably did it, but I think there is is a benefit of having gone home based.
Adam Goldstein - President, Royal Caribbean International
Hi, Scott, it's Adam.
There is no question, as Dan says, that the distribution system is in pain, as many industries and the customers are as well.
One of our jobs as a leading supplier to this distribution industry is to call out their attention to where the opportunities are, for example with the shifting currency, vacation in Europe is suddenly 15% to 20% cheaper than it was just a few weeks ago.
With the perspective end of fuel supplements, that will be a positive for the travel agency compensation model.
The more professional travel agency groups are the ones that are more proactive in looking for ways to get through to the consumer in this environment.
We will continue to work with them, as Dan said, even more closely than before to spur them on, and I think they will get through this just as we all will.
Scott Barry - Analyst
Thanks.
Operator
Your next question comes from Bob Simonson with William Blair.
Robert Simonson - Analyst
Two questions on pricing, this recent fairly substantial deterioration in the pricing picture, has that also affected your preliminary pricing in the last two to four weeks, on what you have been doing and are doing on Solstice and Oasis pricing?
Daniel Hanrahan - President, Celebrity Cruises
Bob, this is Dan.
We have been, as we talked about, we have been fairly cautious with what we have done into 2009 on pricing.
Our focus really has been on close-in bookings, and we have taken some pricing action on Solstice for the fourth quarter, and a little bit into January and February.
We have seen it help stimulate demand.
So actually, in the last couple of weeks, we have seen a pick up on Solstice, and I think it's the result of some of the things that we've done on pricing.
But out in to the future, we have been careful not to do anything dramatic at this point.
We want to protect the integrity of new ship, and we'll watch it very closely.
Our revenue management team is watching this very closely and will make decisions on what to do beyond January and February, as we get closer to that time period.
Adam Goldstein - President, Royal Caribbean International
Bob, it's Adam.
Of course Oasis is in a different position from Solstice, Solstice coming out in the next few weeks into service, and Oasis still being more than a year from its maiden voyage.
I mentioned before that the development of the bookings to this point is positive, and therefore the development of the pricing to this point is positive.
Robert Simonson - Analyst
Okay, and a second question is, again, in the same vein of the deterioration of the pricing environment,.
Can you qualify or quantify the change that you're seeing, is it more on the North American side or on European side, again you can do it in constant, whatever dollars that are easier to explain it.
Daniel Hanrahan - President, Celebrity Cruises
I mentioned before, Bob, in my comment, that as an overall matter, it seems that the international points of sale are a little bit more robust now than what we are experiencing from North America.
The currencies are moving in different ways, and it's up to the travel agents to take advantage of the messaging depending on which way it's going, because we have a lot of capacity that's based in Europe, for Europeans, and we also afford them a lot of opportunities to travel afar, and the reverse is true for North Americans.
The messaging is going in the appropriate direction.
We are pushing products into Europe that are interesting and different than in the past, shorter cruises, cruises particular to different markets, and we are hopeful.
The thing is that those programs are still seven to 12 months out for the most part, and our visibility is limited.
Adam Goldstein - President, Royal Caribbean International
Bob, with respect to that, Europe, we also want to comment Europe is not homogeneous either, and within Europe you're seeing different [pockets] of strengths and weaknesses.
The Spanish market is one of those that was the worst hurt and the earliest hit, so actually when we get into '09, that will give us slightly easier comparables.
But I think in general most observers are looking to similar kinds, some people say even stronger kinds of economic concerns there too.
Robert Simonson - Analyst
Thank you very much.
Operator
Your next question comes from Tim Conder with Wachovia.
Timothy Conder - Analyst
Thank you.
Brian, how should we think about if all these fuel surcharges are refunded, how should we think about that year-over-year swing in net yields, I mean again, I guess basically asking the question from the standpoint of zero fuel surcharges versus on the other extreme 100%, how would that I mean impact '09.
And then, any commentary, your fuel hedges for '09 you said were 39% and if I remember correctly they were 25% when you reported the last time.
What levels were those incremental hedging contracts put on that?
Brian Rice - EVP, CFO
The fuel hedge position on the last call was 22%, I don't have in front of me what the average hedge price of the new were done at.
We layer them in over the course of the quarter fairly equally in the individual months.
But, even though we haven't correlated too tightly with WTI until recently again, you could probably get a pretty good proxy, and I think it you want to give Ian a call later this afternoon, he might be able to help you do the math on that.
In terms of the fuel supplements we are continuing to collect fuel supplements into '09, for '09 sailing.
Our policy will be that if the WTI price falls below $65.00, we will refund anything that we have collected in the form of an onboard credit.
I think you could probably play with the calculation in that our charge day is $10.00 per APCD, and we've provided our press release dates that we'll do the calculations and tried to keep this simple for the consumer to be able to track.
I think frankly, if fuel goes below $65.00, giving back those credits in terms of an onboard revenue, with the affected fuel savings that we will experience will be a good guide for us.
Timothy Conder - Analyst
Okay.
Part of the 4X questions from before, is part of that explained, Brian, by the two month lag in accounting for Pullmantur, and then as we've all seen, the dramatic changes in the foreign currency exchange rate?
Brian Rice - EVP, CFO
That's a good point.
The fourth quarter for Pullmantur will be August, September, and October.
August, September being two of Pullmantur's strongest months.
Not only do you have the higher basis of revenue being impacted which is your point, I think, also the dramatic fluctuation of currency levels itself, but yes, that is a significant part of the calculation.
Thank you for pointing that out.
Timothy Conder - Analyst
Then relating to the cost initiatives in the $125 million, just a clarification point you're already getting some of those benefits here in 2008, and you're still calling for an incremental $125 million beginning in '09?
Brian Rice - EVP, CFO
Tim, the $125 million in '09 is an annualized number, so it wouldn't be incremental to '08.
We did get some of those benefits, but then we also had a corresponding debt of one time charges that we talked about on our last call.
That would be an offset.
But the 125 is an annualized.
I think a good way to look at this is we've talked about our net cruise cost ex-bunker being at or below '07 levels on an APCD basis.
I think that would be the best way for you to begin modeling '09.
Timothy Conder - Analyst
Great, thanks for the clarification.
Operator
Next question comes from David Leibowitz with Horizon.
David Leibowitz - Analyst
Good morning.
A few numbers I was not certain about, when you speak to a lower load factor going forward that you are willing to accept, are we to take that something below 100%, or is it going to be something lower than the 105% to 107% you've been enjoying?
Brian Rice - EVP, CFO
David, let me clarify the distinction that I'm making for the near term, is the percentage of booked business for further out sailing, not necessarily what we'll eventually sail at.
We had a tolerance to allow ourselves where, over the last three years we have had a very solid order book, where a higher percentage of our inventory has been been sold for future sailing, we've allowed that to come down a bit just because we don't think the consumer is ready.
But to your point, I think there will be instances that, if this environment continues, that we would choose to make a trade off decision where our discounting would actually get to a point of diminishing returns, we may have to take a trade off to have lower load factors.
I think that would be on a more tactical basis than the structural wholesale changes of lower load factors, so given what we know today, I think you would continue to see our load factors above 100% in the foreseeable future.
Operator
Your next question comes from Brian Dobson with SIG.
Bob LeFleur - Analyst
It's actually Bob [Lefleur] at SIG.
I want to talk about the fuel sensitivities and just make sure I'm understanding this correctly, given the changes to your forward guidance for fuel.
Last quarter you told us that a $10.00 move was $59 million, and we had about six or seven $10.00 moves since then, and the average that you've taken your fuel cost down is more like $38 million per $10.00 move.
So, given your new sensitivities of $51 million per $10.00, I'm just trying to understand how that changes the farther away from the base case that we get, and when we look at the new sensitivities, how can we expect that to change in multiple increments of $10.00 moves?
Brian Rice - EVP, CFO
Bob, I can give you a couple of directional things that may be influencing your calculations.
I think it would probably best if you can sit with Ian and walk through the mechanics of it.
We do layer in additional hedges throughout the quarter.
For '09 for example, we went from 22% to 39% hedge.
And you can use WTI as your basis for the different levels we were hedging at.
The one thing I will mention that I'm not sure we have really described thoroughly enough in the past, is our hedging is all being done with IFO fuel.
It's very difficult to get hedging for MGO fuel, because we can't get the accounting correlations that are required.
And IFO tends to be a much lower priced fuel than MGO.
When we are talking about our hedge position, we are talking about our consumption in terms of metric tons that is hedged, which is a different amount than our dollar exposure.
So I think if you work with that, that might help you understand a little bit of it.
But again, if you could follow up with ian, he can work through the mechanics with you.
Bob LeFleur - Analyst
Thanks.
Operator
Your next question comes from Dag Sletmo, with ABG.
Dag Sletmo - Analyst
Hi, two questions, the first is could you just remind us of your most important debt covenants and the key levels.
Secondly, in relation to the financing guarantees for your ship orders, will you need to come up with any equity in addition to the loans you've got?
Brian Rice - EVP, CFO
Dag, affectively we have three loan covenants in our financing.
The first net debt to equity, or net debt to cap.
I believe the covenant to be 2.5%.
We have a fixed charge coverage ratio of 1.25, and we have a minimum shareholder equity amount that varies year to year, that includes a percentage of our retained earnings in any given year.
For the foreseeable future, given what we see, we don't have concerns about any of those covenants, and I think if you took some of your models and you stress test them, you can see that we have quite a bit of bandwidth to be able to absorb for deterioration before any of those would come into play.
In terms of equity, we don't see as I mentioned in my script, any need to go after the capital markets for the foreseeable future.
We believe the financing arrangements we have in place for all our new builds will be more than adequate.
Dag Sletmo - Analyst
But these financing arrangements, will they finance the entire purchase price of the ship or will they finance part of it, then you need to come up with equity for the ships.
I don't mean issued new equity in the market, but come in with new equity for the ship as such.
Richard Fain - Chairman, CEO
The financings cover 80% of price of the ship, but remember we've already paid installments on much of that.
And then there is our normal operating cash flow.
So, we've looked at all those together and think at least to the extent we can, that that is adequate to meet the requirements.
Dag Sletmo - Analyst
Is any risk that lenders will demand equity to come in earlier in the construction cycle?
Richard Fain - Chairman, CEO
Well there always risks, almost anything at this point.
No one is going to say there is no risk of any subject.
But these are, we have tried to describe them as well as we can.
These are commitments and not contingent upon putting in more equity or anything like that.
Dag Sletmo - Analyst
Just a final question, are there any remaining formalities relating to these guarantees, such as approval by the parliaments in the relevant countries, or are there any cases of the guarantees of this type having been canceled?
Richard Fain - Chairman, CEO
No cases of such guarantees being canceled that I've ever heard of, nor are there any of those kinds of contingencies, there are normal kind of funding requirements, but none that we consider particularly (inaudible).
Brian Rice - EVP, CFO
Brittany, even though we are running you of time we will take one more question if we could please.
Operator
Okay, your final question will come from Jamie Rollo, with Morgan Stanley.
Jamie Rollo - Analyst
Just a quick clarification, please.
On the pricing in the fourth quarter, I think your previous Q4 yield guidance was growth of 4% to 5%, it's now down 5%, and you say half of that is FX.
So, it's fair to say there been around a 5% hit from the recent downturn in bookings, is that correct?
Brian Rice - EVP, CFO
Jamie, our previous guidance was up between 4% and 5%, and now we're guiding down 4% to 5%.
A little over 50% of that is driven by FX 300 basis points of it is being driven by Pullmantur's FX.
And then it's a combination, in order of impact, of softening or lower pricing in the fourth quarter.
Also deterioration in the Pullmantur tour business, which we mentioned had an offset on the cost side.
Lastly, some pressures on onboard revenue.
But sequentially it would go FX, business deterioration, tour division and then onboard expense would all be the contributing factors.
Jamie Rollo - Analyst
So the 5% has been non-FX, given you would have been at least, I'm guessing 75%, 80% booked, when you last gave your guidance for the fourth quarter, would that imply ticket prices and onboards together down around 20% or so for those final 20%, 25% of bookings.
I'm trying to get a feeling for the quantum of the overall revenue decline for those final chunk of bookings; it's obviously quite hard to read it from the exact slide three, but as the math said, is that broadly correct?
Brian Rice - EVP, CFO
That's high in terms of your calculation.
Remember, the tour division has an impact, there is no capacity associated with it.
It just deteriorates the revenue quite rapidly.
So I think your 20% calculation is high.
I would also mention the fact that, and I don't have where the book load factors were at the time of this new initiative discounting, but you get churn of business, even though our cancellation rates have not been higher than previous levels, you do have some higher value business that did come off as being replaced by lowered value business.
Richard Fain - Chairman, CEO
I think you also ought to keep in mind that the fourth quarter is traditionally our weakest and most price sensitive quarter, and that people who are buying on the margins, the margins always are more sensitive than the base business if you will.
So if I understand you trying to extrapolate from that, the broader market is a little hard to quantify, in such precise terms as you appear to be trying to do.
Jamie Rollo - Analyst
Thank you very much.
Brian Rice - EVP, CFO
Thank you very much, we certainly appreciate you joining us today.
Sorry we couldn't get to everyone's questions.
As I mentioned Ian Bailey will be around and available to help you with any further questions you may have.
Have a great day, thank you.
Operator
This concludes today's conference call you may now disconnect